There are an estimated 200,000 US born American citizens living in the United Kingdom. This does not include US citizens who were born outside the US, or green card holders who may still be living abroad. In addition, people who hold US assets can have US tax matters.
The US tax system casts a very wide net. If you are a US passport holder or were born in the US then you are a US person for tax purposes and are subject to US tax on worldwide income and gains. If the person is a green card holder, even if that green card has expired but not been formerly renounced, then the tax rules may apply. Finally, citizens of other countries who spend enough time in the US to come under the US residency test also come into the net. As well as federal tax, there are state taxes to consider.
Generally speaking, in practical terms, the application of the double tax treaty means that the impact can be alleviated, but it still involves filing tax returns and using the exemption. As is well known, in the past few years the US Revenue has been more assiduous in requiring that citizens complete tax returns and this can involve a significant cost simply in professional fees, even if no tax is actually payable as a net result. Hence many US citizens have been renouncing their citizenship.
Transferring assets in the US can potentially be a disposal for capital gains purposes. There is the potential to have a tax free transfer of assets where the transfer is incidental to divorce if the transfer is between US persons. However, there is a time limit. The situation changes if one party is a US person and the other is non-resident. In that case, a transfer to the non-resident person may suddenly produce a US tax liability.
A similar problem can arise where US based assets are being transferred between two non-US persons.
There is no exemption for the private primary residence, like the UK has. There is a shelter of $250,000 provided the property was the main home for 2 out of the last 5 years.
The US Revenue treats spouse maintenance/alimony as income taxable by the recipient, although it is deductible by the payer. That is precisely the opposing position to the United Kingdom. It is possible to opt out of that treatment but it requires specific wording to do so.
The transfer of pensions does not generally raise any immediate tax issues. However, transferring US based pensions requires a Qualifying Domestic Relations Order (a “QDRO”) to be made in the US to give effect to any agreement contained in a UK Order.
It is common for a US couple to file joint returns in the US. This will involve comingling of foreign tax credits, losses and other carry-over items. These need to be unpicked and allocated to the individuals once they start filing separate returns, and this can be quite a complex exercise. It is not made easier by the fact that usually one spouse takes on the responsibility to deal with it during the marriage, and if they have failed to do it for a couple of years, it creates a problem for the other spouse.
We work closely with professional advisers in these cases and we have long and detailed experience with dealing with them.
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